Do You Need a Home Improvement Loan?

Your home is your most valuable asset, and the most essential thing you own. Keeping it in good working condition is worth every penny. Luckily, routine home improvement isn't too expensive. But perhaps your family is growing, you have a stable source of income, and you're looking for an upgrade. Buying a completely new house is probably the last resort for many, but paying for a new addition to your current home or otherwise updating it to meet your needs can still be a drain on your finances. 

That's why many banks offer a wide variety of options for financing a home improvement project. Home improvement loans can take the form of conventional loans, or they use the value you've already built up in your home as cash that can be borrowed against. The type of loan you get to complete your home improvement project depends on the equity you've built up in your home, your savings and a variety of other factors.

"Know how much you'll owe before getting a home improvement loan."

Do I need a home improvement loan?
Before you sign on the dotted line, consider the basics about your home improvement project and whether or not a loan is right for your situation. Renovating your home can add some serious value to your investment when it comes time to sell. But don't sacrifice a small boost in value for a big bill when it's all said and done. Also consider your credit score, which will determine what financing options are available to you. Without a good credit history, loans may be more expensive and detrimental to your overall finances. It's important to weigh these considerations before committing to a home improvement loan of any kind.

Once you've decided you're ready, though, there are many options to consider. Home improvement loans generally fall into two categories: secured and unsecured.

Secured loans
When a loan is secured, it just means the lender will require borrowers to put up collateral before approval. In the case of secured loans used for home improvement, this takes the form of partial ownership of your home. Zillow explained that two of the most popular secured loans   for home improvement use your home's equity as collateral. Equity is the difference between the market value of your home and how much you have paid into the mortgage.

Home equity loan or line of credit
A home equity loan is the most straightforward of secured loans. According to Zillow, homeowners opting for this type of loan are usually advised to borrow about 85 percent of the equity that's already in the home. This loan is given to owners in one lump sum. This loan is then paid off within a certain amount of time, typically 15 years at a fixed rate. This is why home equity loans are often referred to as a second mortgage. Failure to keep up with loan payments will result in the lender taking ownership of the home, which makes these loans just as important as a typical mortgage.

The other most common secured loan option for remodeling is called a home equity line of credit. HELOCs are also secured based on equity, but function more like a credit card than a lump sum loan. As Wells Fargo explained, HELOCs function based on a draw period and then a repayment period. During the draw period, homeowners can borrow from their home equity up to a certain amount per month. This usually lasts for about 10 years. Then during the repayment period, the amount borrowed is repaid with interest. 

The amount of interest you are charged from using a HELOC is variable, unlike a regular home equity loan that maintains a fixed rate.

Unsecured loans
An unsecured loan, according to Bankrate, is any loan that does not require the borrower to post collateral . That means that credit cards and straightforward personal loans are typically considered unsecured loans. While these loans may be easy to get approved for and come with few upfront costs, they will require either a high credit score or the willingness to pay significantly more down the road, according to Bankrate. However, they may still be worthwhile alternatives to secured loans, particularly for homeowners with little equity in their home. For smaller-scale projects, unsecured loans are hard to beat.

For more information on financing projects large and small, don't hesitate to reach out to the professionals at Vectra Bank.